Former Homeowners Get a Second Chance

They return to the market as FICO scores rise and foreclosures fade | “One of the great tenets of credit is that time heals”

Prashant Gopal


Jason Schmitt lost his $90,000-a-year job on an oil rig in 2009. The bank repossessed his Tulsa home and a rental property, and the former U.S. Army combat engineer filed for bankruptcy. Last month, after moving with his family to his Missouri hometown, he bought the $75,000 three-bedroom home he had been renting with the help of a Veterans Administration mortgage that lets borrowers buy property only two years after a foreclosure. “I’m not embarrassed by saying we had a bankruptcy — it seems that so many people have fallen victim to losing their job,” says Schmitt, now a nursing recruiter for the U.S. Department of Veterans Affairs. “We’ve come back from this, and we are not going to give up on homeownership.”

Even as banks impose stricter mortgage standards, the improving job market is lifting incomes and helping families such as the Schmitts repair credit scores, expanding the pool of eligible buyers and providing additional firepower to the housing recovery. About 7 million mortgage holders have had to leave their homes since 2007 because of foreclosure or a short sale, in which a property is sold for less than is owed, according to RealtyTrac. More than 1 million of them are now eligible for mortgages backed by the Federal Housing Administration, which considers applicants three years after a foreclosure or short sale, says Mark Zandi, chief economist for Moody’s Analytics. Eligible households will expand to nearly 2 million by the end of 2014. “This could be a significant source of housing demand going forward,” Zandi says. “Lots of people lost jobs through no fault of their own. They will be good credit risks in a reasonably good economy. It was not their willingness that was the problem, but their broad ability to pay.”

As the economy has recovered, Americans have lifted their credit scores by paying off credit cards, car loans, and other debts, says Joanne Gaskin, product management director for scores at FICO, which assesses creditworthiness. Says Ezra Becker, a vice president at credit bureau TransUnion: “One of the great tenets of credit is that time heals.”

While lending standards remain restrictive compared with the real estate boom, they’re easing. The average FICO score for conventional home loans fell to 761 in February from 764 a year earlier, according to Ellie Mae, which provides software to the mortgage industry. Average down payments declined to 20 percent from 22 percent. Lenders may further loosen standards when the current refinancing boom ends and they turn their focus to home buyers, according to Andrew Davidson, president of Andrew Davidson & Co., a consulting firm.

To rebuild their credit, Schmitt and his family kept to a budget, planned meals a week in advance, gave up eating out, and paid all their bills on time. To establish a new credit history, they got a $500 line of credit from their bank and made minimum payments for a year. Schmitt’s FICO score climbed to 693 after bottoming in the low 500s. He made $25,000 a year when he was hired by the VA in 2009; after a recent promotion he earns $58,000. “This is the American dream,” he says. “We want to plant our roots. We want our kids to be able to say, ‘That’s where I grew up. And that’s my room.’”

The bottom line More than 1 million of the 7 million homeowners who had foreclosures or short sales since 2007 are eligible for FHA mortgages.


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